How to Evaluate and Grow Marketplace Retention

This blog is part 1 of a 3-part Reforge blog takeover series, where Reforge experts help product and growth leaders improve their retention. Interested in marketplace retention? Be sure to check out Ben Lauzier's Marketplace Growth course at Reforge.

What is a Marketplace?

The best way to understand what a marketplace is to think about a real-life bazaar. It brings together two groups of people: sellers and buyers.

Adam Fishman, Chief Product and Technology Officer at ResortPass and Reforge Expert paints the picture:

“You can think of it like the spice market in Istanbul, Turkey. If you’re a tourist and you want saffron, you go there because that’s where hundreds of vendors sell saffron, so you know it’s a great place to get it.”

A digital marketplace is a platform that connects and aggregates both sellers and buyers, rather than a specific physical location. The core part to understanding a digital marketplace is that it can be very different from a digital product, or a SaaS product. A marketplace is not the end product that a user buys, it is the facilitator.

​​“When you’re building a marketplace, you’re not building the actual product. You’re building the platform that facilitates the end product getting to the user.”—Kleanthis Georgaris, SVP of Product at Toptal and Reforge Expert

Why is retention difficult to evaluate in a marketplace?

Marketplace dynamics make strategy and decision-making particularly challenging across the board. You are trying to serve two different customers—supply and demand—simultaneously. These dynamics can make decisions that are straightforward for other SaaS companies more complex. One of the most complex elements of leading a marketplace product is growing the marketplace with strong retention.

Retention is one of the more complex problems for product and growth leaders to solve with any product. It’s important to have the right metric, focus on the right users, build strong habit loops, etc. Product and growth leaders at marketplace companies need to think about all of these things for both their demand and the supply sides of the market

A particularly challenging aspect of managing retention at a marketplace is that you do not have a controlled environment. The experience that your buyers have is not only impacted by your product experience, but also by the quality of the sellers, their composition, and the overall health of the market they're in.

To grow a marketplace with strong retention, there are three critical concepts:

• Healthy growth has very high liquidity, not just high transaction volume
• Set a clear marketplace health metric
• Don’t try to prevent disintermediation churn directly

I’ll define and explain each of these concepts and why they matter to product and growth leaders in coming sections.

Concept 1: Healthy growth has very high liquidity, not just high transaction volume

Often, the measure of marketplace success is the transaction volume. To grow your marketplace, many focus on increasing the transaction volume. If you’re Upwork, you want more jobs contracted. If you’re Etsy, you want more merchandise sold. However, to have a healthy marketplace and retain both supply and demand sides of your market, you have to have very high liquidity.

Liquidity is the efficiency of the marketplace at pairing buyers and sellers.

When there is high liquidity, there are high chances of a perfect match between supply and demand for every given buyer and seller. This is why liquidity is such a strong driver of retention.

Product and growth leaders at marketplace companies are constantly working on achieving better liquidity, as it is always in flux. The key is to increase liquidity while maintaining the marketplace balance. If you have more supply than needed, the supply will be underutilized, have a negative experience, and churn. Or, the supply will become competitive and push prices down, which can impact business viability.

Liquidity changes depending on your stage of business

Early on, the challenge is figuring out how to get supply or demand to the marketplace before the other is there yet. This challenge is often called the “cold start problem.” The most successful marketplaces get started by finding a way to hack and jump-start one side of their marketplace to focus on the other.

As your marketplace grows, the challenge becomes moderating the balance between demand and supply. You need the right amount of supply to match the amount of demand you have, but you also need to be effective at matching supply and demand.

When you grow a company, you have to grow users, and that’s hard. But when you grow a marketplace, it’s an order of magnitude more complex because it’s like balancing two spinning plates at the same time and at the same speed.

There are many different ways to increase the transaction volume in a marketplace. But it’s very easy to increase the number of transactions using an approach that hurts the liquidity in your marketplace, which makes it difficult to retain supply, demand, or both.

What if Lyft had 10x more drivers than passengers?

For example, imagine if Lyft wanted to get to 1,000 rides per day, and each passenger on Lyft takes one ride a day. Lyft could reach 1,000 rides with 1,000 passengers and 10,000 drivers. This would be great for the passengers: They would barely have to wait for a driver because there are 10x more drivers than passengers.

But, you can imagine how this scenario would change the driver experience. Even if each passenger had a unique driver, 90% of drivers would go without giving a ride or making money. Lyft likely wouldn’t retain those drivers long, making it impossible to achieve its target number of rides per day in the future.

What is supply utilization rate and why does it impact retention?

To grow our marketplace while still retaining supply, we need to consider the supply utilization rate. Supply utilization rate tells you what share of total available supply is used by demand. It is an incredibly important metric in a healthy marketplace with high retention.

Let’s consider taking the opposite approach. Imagine again that Lyft has a target 1,000 rides per day, but only 100 drivers. To achieve this scenario, each driver would give 10 rides per day. Drivers would be happy; they are earning and being well-used...But it isn’t the same for passengers. The wait times will be long if they can even get matched with a driver.

Match and fulfillment rates help maintain growth and demand

Similarly, to grow our marketplace while still retaining demand, we need to consider match and fulfillment rates: What share of demand is able to find a match and successfully complete a transaction?

Concept 2: Set a clear marketplace health metric

How do product and growth leaders manage this tension while growing liquidity in their marketplace? I recommend using a marketplace health metric.

A marketplace health metric is a leading indicator of the quality of user experience. It can help you understand the health of supply utilization and demand match and fulfillment rates.

So what is the right ratio of supply and demand? How do you know if you have achieved it? This is where measuring marketplace health and defining a healthy range or target comes into play. Your marketplace health metric should correlate heavily with your demand-supply ratio, and with retention and engagement of your supply and demand.

For Lyft, “estimated wait time” is the marketplace health metric. It correlates with how many drivers there are relative to number of passengers, how likely the passenger is to request a ride based on wait times, and how much earnings a driver is likely to make in this time.

Defining a target range of a single metric, “estimated wait time,” is what enabled Lyft to move quickly across many dynamic markets. When you’re balancing a lot of data, an unpredictable market, and coordinated supply and demand, a single marketplace health metric can provide powerful guardrails on your growth and help you prioritize effectively and make decisions quickly.

Concept 3: Don’t try to prevent disintermediation directly

Disintermediation is when a supplier and buyer take their interactions off of the marketplace platform. Although the marketplace is responsible for matching the supply and demand, the marketplace doesn’t get credited for its involvement. Not only does the marketplace not earn that revenue, but the longer term effect on retention can be even more painful: You’re losing an active user on both sides of the marketplace.

You cannot monetize value you don’t create. If you only create value during the initial introduction, that’s when your users will be most engaged, and when you have to maximize monetization.

One pitfall new marketplace leaders should avoid is trying to impose controls that prevent disintermediation.

“Trying to prevent this from happening through measures is a waste of time. People will always find ways to circumvent your system.”—Kleanthis Georgaris, SVP of Product at Toptal and Reforge Expert

What causes disintermediation and how can you avoid it?

It is critical to understand that disintermediation is caused when people don’t think the value is worth the cost. Instead of fighting to prevent disintermediation, you should fight to improve the value you offer to your users.

The value can also change throughout the user’s relationship with your marketplace. For example, there might be very high value in the first interaction, but far less after a few months. If the cost remains the same, there is an imbalance. For the longest time at Thumbtack, we wouldn’t give pros the customer’s phone number—partially in an effort to prevent disintermediation. But we realized that to address disintermediation, we had to reconsider the value we were offering. We couldn’t charge customers beyond the value we were providing.

Instead of directly imposing controls that will get circumvented anyway, one approach product and growth leaders can take to mitigate disintermediation churn is to increase the value supply and demand get from the marketplace.

Improving value is how you prevent disintermediation

The more value that supply or demand receives from the marketplace itself, the stickier the product gets, and the harder it is for users to disintermediate and churn.

In general, there are three ways to increase value to prevent disintermediation churn and better retain supply and demand:

1. Give supply tools to grow on your platform. This looks like creating new ways for supply to improve and showcase their value. This can include things like providing analytics or discovery tools and investing in upskilling suppliers. For example, Thumbtack shares insights with pros on how they compare with competitors in their area around pricing, reviews, and responsiveness.
2. Make it more convenient for demand. This often looks like making it easier for demand to communicate or collaborate with supply on your marketplace than it would be anywhere else. For example, Thumbtack found that very few contractors would accept payment through a credit card, but this was the way most customers preferred to pay for services because it was the most convenient. Thumbtack would allow customers to pay with a credit card, then Thumbtack would pay their professionals through the preferred method of payment. This provides customers with the most convenient experience for them, maximizing transactions and retention on the platform, while reducing disintermediation.
   
3. Increase trust. This often looks like reducing the risk in a transaction through insurance, by providing guarantees, or helping demand assess supplier quality before agreeing to transact through reviews and/or supplier vetting programs.

Measuring retention is critical for successful marketplaces

The true indicator that a marketplace is healthy and poised for growth is two-sided retention. By understanding your users' experiences, demographics, what they do in your product, and how each of their attributes impact retention, you can better improve the value the supply and demand sides of your platform are getting. You can learn more about how to measure these attributes, assess and improve your retention in Amplitude’s Retention Playbook.

To learn more about marketplace growth specifically, check out the Marketplace Growth course led by Ben Lauzier at Reforge.